Confronting Money Laundering and Terrorist Financing: Canada Considers Vast Changes to AML Regime

The Standing Committee on Finance (Committee) recently released its report, Confronting Money Laundering and Terrorist Financing: Moving Canada Forward (Report), where it makes 32 recommendations on proposed modifications and additions to the Canadian anti-money laundering (AML) regime.

The Report follows and responds to the Department of Finance’s consultation paper (Consultation Paper) on Canada’s anti-money laundering (AML) regime, which was published in February 2018 as part of the five-year statutory review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). For more information about the Consultation Paper, please see our February 2018 Blakes Bulletin: Department of Finance Reviewing Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime.

This bulletin highlights the key changes proposed by the Report and discusses their potential implications, if implemented.

BENEFICIAL OWNERSHIP

The Report recommends that the federal government work with the provinces and territories to create a pan-Canadian beneficial ownership registry for all legal persons and entities (including trusts) for individuals who have at least 25 per cent of the voting rights or a 25 per cent ownership interest.

While this may seem as promising news for regulated entities under the PCMLTFA (Regulated Entities), it is not contemplated that the registry will be publicly accessible. Instead, it will only be available for certain law enforcement agencies such as the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and Canada Revenue Agency.

As such, Regulated Entities will likely continue to be required to obtain beneficial ownership information. However, promising developments regarding beneficial ownership information are underway.

In December 2017, the federal and provincial ministers of finance agreed to pursue legislative amendments to federal and provincial incorporation statutes to ensure that corporations hold up-to-date information in respect of beneficial owners.

The federal government is honouring this commitment with proposed amendments to the Canada Business Corporations Act, pursuant Bill C-86, Budget Implementation Act, 2018, No. 2, which has received first reading and is currently making its way through the legislative process. While this is not the panacea that Regulated Entities had hoped for, it is definitely progress from the current state of affairs.

POLITICALLY EXPOSED PERSONS

In another positive development, the Report recognizes the challenges that the Politically Exposed Person (PEP) provisions of the PCMLTFA pose for Regulated Entities. Specifically, the broad definition of PEPs, which includes not only the PEPs themselves, but also their prescribed family members and individuals who are closely associated with PEPs. The Report also notes that many institutions treat the determination of PEPs differently.

After hearing evidence from numerous parties in respect of the PEP provisions of the PCMLTFA, the Report recommends that the statutory definition of a PEP be reviewed, refined and clarified. The Report specifically notes that the concept of “association with a PEP” creates ambiguity and inconsistency among institutions about who exactly is a PEP.

The Report also recommends that Canada move to a risk-based model of compliance for PEPs, softening the requirements for those with transparent and unsuspicious financial portfolios. The recommendation is consistent with the 2017 version of the Wolfsberg Guidance on Politically Exposed Persons, where the 13 global banks comprising the Wolfsberg Group advocated for a more risk-based approach to PEP determination and treatment.

EXPANDING PEP AND BENEFICIAL OWNERSHIP REQUIREMENTS

Under the current PCMLTFA, only certain Reporting Entities (financial entities, money services businesses, securities dealers and life insurance agents) are subject to the requirement to identify PEPs and to make beneficial ownership determinations in respect of corporate and other entities.

In this regard, the Report recommends that all Regulated Entities be subject to the PEP and beneficial owner requirements in the PCMLTFA. If implemented, this would subject other sectors including casinos and real estate brokers to the beneficial ownership and PEP requirements of the PCMLTFA, creating additional compliance measures for such entities.

WHITE LABEL ATM SERVICES AND ARMOURED CARS

The Report also recommends that the white label ATM and armoured car sectors both be subject to regulation under the PCMLTFA.

In respect of the ATM sector, in Canada, ATM operators are only subject to oversight in Quebec but even in that case, they are not subject to an AML reporting regime.

In respect of the armoured car industry, the Report notes the potential for the use of armoured cars to obscure the origin of funds. It recommends that, similar to the United States and other jurisdictions, the armoured car sector be subject to the Canadian AML regime.

REAL ESTATE SECTOR

While there is AML regulation for certain participants in the real estate sector, the PCMLTFA does not regulate all entities involved in the real estate sector that are in a position to gather and report relevant information in respect of money laundering.

The Report recommends that the provisions of the PCMLTFA that apply to the real estate sector be expanded to apply to mortgage insurers, land registry systems and title insurance companies. This recommendation will be significant for those involved in these industries.

STRUCTURING

While structuring has long been recognized as an indicia of suspicious activity, in Canada, unlike in the United States, it is not prohibited under the PCMLTFA or under the Criminal Code.

In this regard, the Report recommends that similar to the United States, structuring transactions in a manner designated to avoid record-keeping or reporting requirements under the PCMLTFA should be a criminal offence (for both customers and regulated entities).

The Committee recommends that the provisions be modelled on Title 31 of the U.S. code (section 5324). This is noteworthy as this section of the U.S. code goes beyond the structuring of transactions to also make it an offence to cause a regulated entity to file a report or retain a record that “contains a material omission or misstatement of fact”.

LUXURY GOODS SECTOR

The Report further recommends that companies selling luxury items should be subject to PCMLTFA requirements, including the requirement to report large cash transactions if these are not reported by other means.

The Report specifically refers to luxury automobile dealers, art and antique dealers and auction houses selling precious metals and stones. This will inevitably require more enhanced due diligence by the financial institutions that provide banking services to these sectors.

CASINO SECTOR

The Committee made numerous recommendations to change the PCMLTFA as it applies to the casino sector.

Specifically, in addition to the casino sector being subject to PEP and beneficial ownership requirements, the Report recommends that all casino operators, employees and front-line personnel be trained in AML legislation.

The Report also recommends that the federal government establish an information sharing regime through FINTRAC and provincial gaming authorities to ensure more accurate and timely reporting. The recommendation is welcome news for casinos given that the provincial authorities have access to information about patrons that the casinos themselves may not, and if implemented, should facilitate better information flow between the parties.

Lastly, the Report recommends that the government enhance the direct reporting system of casinos so that in addition to suspicious transactions, suspicious activities be required to be reported. This change goes hand-in-hand with the recommendation to train all employees in the sector.

CRYPTOCURRENCY

Although recent proposed amendments to the PCMLTFA look to regulate those dealing in virtual currency (see our June 2018 Blakes Bullein: The Good, the Bad and the Ugly: Revised Regulations to PCMLTFA), the Report provides more specific recommendations for crypto-exchanges and crypto-wallets.

Specifically, the Report recommends that the government establish a regulatory regime for crypto-wallets so as to ensure that proper identification is required and that the true ownership of wallets is known to the exchanges as well as to law enforcement.

The Report also notes that both bitcoin purchases of real estate and cash cards should be tracked and subject to AML legislation. Furthermore, the Report recommends that the government regulate crypto-exchanges at the point that fiat currency is converted so as to establish these exchanges as money services businesses.

More significantly, the Report proposes that the government establish a licence regime for crypto-exchanges in Canada that includes an AML program. In this regard, the Report recommends looking to the New York’s program as a model for best practices.

It is noteworthy that the licensing regime for crypto exchanges in the state of New York has come under intense scrutiny by industry participants and others for hampering innovation in the State given the arduous licensing process.

SUSPICIOUS TRANSACTION REPORTING

Interestingly, the Report recommends that suspicious transaction reporting focus on suspected violations as opposed to an “arbitrary monetary threshold”. However, in Canada, there are no monetary thresholds for reporting suspicious transactions — they can occur at dollar zero. It may be that this recommendation was meant to be a reference to large cash transaction reporting, which is discussed in the Report, where it is noted that the C$10,000 threshold may be viewed as arbitrary.

GEOGRAPHIC TARGETING ORDERS

Similar to the commentary in the Consultation Paper, the Report recommends amending the PCMLTFA to allow for geographic targeting orders similar to those that are provided for in the United States.

In the U.S., geographic targeting orders are used to target high-end residential real estate transactions that are paid for in cash in six major metropolitan areas. The regulation of mortgage insurers and title insurance companies under the PCMLTFA will facilitate the reach of these targeting orders.

INFORMATION SHARING

The Report makes several recommendations regarding the sharing of information that will facilitate the coordination of efforts in respect of the fight against crime and money laundering.

For example, the Report speaks to tabling legislation that would allow information related to anti-money laundering and anti-terrorist financing to be shared between federally regulated entities (provided that FINTRAC is notified). As previously noted, the Report also recommends information sharing between FINTRAC and provincial gaming authorities.

CONCLUSION

It remains to be seen which of these recommendations will actually be reflected in draft legislation. In the meantime, Regulated Entities and others affected by the Report are wise to stay tuned for further developments.

For further information, please contact:

Jacqueline Shinfield                  416-863-3290

or any other member of our Financial Services Regulatory group.